Store Credit Cards Exception To Trend Of Lower Interest Rates

Store Credit Cards Buck Low-interest Trend

Cheaper Rates Not Reflected In Retail Sector

Interest rates that banks charge big businesses when loaning money are lower today than at any time in 20 years. As a result, consumers have benefited from lower rates for mortgages, car loans and even for bank-issued credit cards.

So it may surprise G. Fox credit card holders that they are still paying 18 percent interest. Or customers with the Lechmere card may wonder why they are charged 19.86 percent. Macy's card holders may find it particularly troubling that the rate on that store's card increased to 21.6 percent in May 1991, up from 18 percent.

The dramatic decline in interest rates in most segments of the economy has not been reflected in the rates department stores and other retailers charge on their cards.

Merchants say they have to charge higher rates for a variety of reasons, including that retail cards generate less money than other types of lending and because credit card operations are costly. But some consumer officials still think the rates are too high.

"I certainly think that, in this era of generally lower interest rates, retailers should be offering a better deal than they are," said Gloria Schaffer, the state's consumer protection commissioner.

Consumer officials in Connecticut, Massachusetts and elsewhere say, for example, there is no justification for the True Value Hardware card to carry a 22 percent interest charge on the first $1,000 in purchases when the newly issued General Motors MasterCard charge is only 16.4 percent.

Although Connecticut law limits the annual interest rates retailers can charge to 18 percent, the cards can carry higher rates if they are issued on a retailer's behalf by a financial institution, such as a bank.

For example, the True Value card is issued by United Missouri Bank in Kansas City, the Lechmere card by Hurley State Bank of South Dakota and the Macy's card by General Electric Credit Corp.

in Stamford.

Merchants say it is unfair to use rates for consumer loans, bank-issued cards and other lending as a gauge for what they should charge for their cards.

"When you look on the face of it and you see an 18 percent figure, the natural reaction is to say the rate is too high," said Ronald J. Pugliese, president of the Connecticut Retail Merchants Association. "And the people who say that don't understand the issue and don't know the costs that are the direct result of running a credit operation."

Retailers say they have to impose higher rates because several factors make it more expensive to run their kind of credit-card operations.

They say retail cards are easier for riskier consumers to obtain than are bank-issued cards; and, unlike most bank-issued cards, there is no annual fee.

They say the poor economy is causing a higher percentage of customers to default on what they owe and that consumers generally will put off making payments on a retailer's card before they stop paying on a Visa or MasterCard.

And they say retailers' cards generally have lower average balances -- about $200, compared with $1,500 to $2,000 for bank-issued cards -- and, as result, generate less money for the issuer.

"To the retailer, that means he has to do a high volume of business to cover his costs because his revenue is so small per customer," said Ray McAlister, a business professor at the University of North Texas and a consulting economist to retailers.

And while the customers are making payments, retailers say, merchants must borrow the money needed to operate their businesses. Such borrowing often is done using long-term financing instruments, such as 20-year bonds, that insulate retailers from unpredictable fluctuations in short-term rates. But merchants say that also means that they are not receiving the full benefits of today's low rates.

The St. Louis-based May Department Stores Co., which owns G. Fox, currently is paying about 9 percent to borrow money against its credit card debt, 3 percentage points over the prime rate. The prime is the rate banks charge their best commercial customers for short-term loans.

Like many merchants, G. Fox officials say the interest their card holders pay does not completely cover the cost of that borrowing and of running the credit card operation.

"We lose money on our credit operation. So the interest that we do receive helps offset some of those costs," said Deborah Riggott, a spokeswoman for G. Fox.

Ronald T. Urquhart, the People's Bank vice president who runs the bank's credit card operation, said he was surprised to hear that G. Fox is losing money on its own card at 18 percent.

"If they're losing money, they ought to be talking to a bank to take [the credit card operation] over for them," he said.

In today's economy, he said, People's could run the G. Fox credit operation profitably and charge the store's customers only 15 percent or less. He invited G. Fox officials to meet with him.